Finastra Head of Working Capital Finance Michael Walker says the finance community needs to create momentum around sustainable finance and re-assess the treatment of human capital in supply chains; He argues that its no longer just a reputational and regulatory risk but also an operational one.
By Michael Walker
The pressure on the corporate world to transition to a more sustainable model has been building for some time, but now more than ever companies are being forced to adapt.
A number of factors are converging to accelerate these changes, including the impact of the current pandemic, growing consumer social consciousness, the political agenda, increasing investor focus, sustainability enablers and the cost of climate change.
Recognition of the importance of sustainability in supply chains and its potential impact on the associated financing practices is steadily growing in Asia.
An increasing number of businesses have identified sustainability as a differentiator and a strategic pillar for growth, further amplified by governments actively publishing guidelines and strategies to meet the United Nations Sustainable Development Goals. However, there is still a sense that sustainable finance is a ‘nice-to-have’ rather than a ‘must-have’, with limited incentives for corporates and finance providers alike, beyond being viewed as an ethical and sustainable brand.
There are three key factors we believe will have the most significant impact in driving change in the near term: firstly, the impact of Covid-19 and how businesses are having to rethink their future business models; secondly, the importance and influence of regulation and government incentives; and leveraging technology and innovation.
Emerging from Covid-19
Sustainability will become even more important as we emerge from this pandemic. Known issues around digitalization and access to finance, particularly for SMEs and emerging market consumers, have been exacerbated during the crisis, as the shortcomings of countries and businesses alike are brought into focus.
Primarily, the situation is forcing the finance community to look at the treatment of human capital in supply chains – what was once seen as reputational and regulatory risk is now an operational one. Financial services providers play a key role in this as their actions and stance on the issue can have a significant impact on businesses and people’s access to capital. This is the time for financial services stakeholders to create an environment that is conducive to capitalizing on the momentum around sustainable finance.
Regulatory backing needed
One of the most direct and effective ways of impacting change is stepping up regulatory requirements or investor demands to drive these efforts. Transformation is already happening on a regulatory and understanding level as industry bodies push for a standardized definition of sustainable finance and common ESG standards.
While the EU’s ‘Taxonomy on Sustainable Finance’ issued in June 2019 has arguably led the way in introducing increased disclosure and transparency practices on a global scale, Asia’s regulators have also been making headway. Hong Kong’s recently upgraded ESG disclosure obligation, effective from 1 July 2020 for companies listed in the city, is designed to make issuers and their boards take the lead in improving ESG reporting and providing information for decision making in sustainable finance.
Similarly, the mainland Chinese securities regulator will implement stricter ESG disclosure rules, following Hong Kong’s lead. In Singapore, mandatory ESG reporting rules also reflect and respond to the growing emphasis by investors in their investment decisions.
The Monetary Authority of Singapore has implemented several schemes to promote sustainable finance in Singapore. One such initiative is the creation of the Asia Sustainable Finance Initiative last year, a multi-stakeholder forum that aims to utilise the power of the financial sector to deliver on the United Nations Sustainable Development Goals and the Paris climate agreement.
Leveraging new technologies for transparency
The monitoring and governance of sustainable finance is another area where reform is needed. Currently, sustainable transactions and programmes are more costly to administer from a bank’s perspective and do not receive any capital relief. This materially impacts the cost of finance for the corporate client. A more cost-effective system can be achieved via the standardized use of new technologies and innovations.
IoT, AI and DLT are among the emerging technologies that have the potential to significantly reduce monitoring overheads in the future, making it more appealing and lucrative for banks to offer sustainable products. Using open platforms to bring these services together is also crucial for driving ecosystem collaboration and orchestration. Banks can leverage the available solutions across industries in a standardised way, while also making the process quicker, cheaper and more flexible.
Making use of data-linking tools, such as AI and blockchain, will enable greater tracking and transparency in all aspects of a supply chain, allowing improved self-governance for each value chain actor.
Looking at an industry example, in 2019, US-based fintech, Envisible, used its blockchain technology to establish a traceable supply chain for a community of farmers in India, delivering sustainability benefits to all value chain actors. By digitising the billing and payment processes, the farmers can keep digital, immutable records of key information and transactions which can then be shared downstream with the rest of the supply chain, including global corporations and even consumers.
Having this visibility is a step forward in altering how we think about supply chains, linking consumers to the product source and driving corporations to better consider the sustainability requirements of such communities.
In order for sustainable finance to thrive in reality and not just on paper, it needs to make economic and commercial sense for the industry to put into practice. The spread of digital finance, accelerated by Covid-19, will not only make financial services more inclusive, but will significantly open up new opportunities for the industry, further incentivising the adoption of sustainable finance.